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PIIGS is Equal to the Challenge says Leading Bond Expert; Urges Caution for Retail Bond Investors

Portugal, Ireland, Italy, Greece and Spain - collectively the 'PIIGS' - are looking more buoyant as economies recover and bonds are shored up by the ECB.

Head of
fixed income at Old Mutual Global Investors, Christine Johnson, believes that
Europe’s ‘periphery’ nations are on the way back for bond investors as economic
growth improves.

Johnson considers the yields they offer are 'certainly
more attractive' than those in core nations such as Germany and France, but
said that ‘investors still need to do their homework on each individual bond offering rather than
being country specific'.

‘The bond
markets within the Eurozone are now more sensitive to GDP movements as
investors generally become more optimistic regarding prospects for future
growth,' she said. 'Investors are now less defensive in their outlook for bond
markets.’

Since
European Central Bank (ECB) president Mario Draghi confirmed that it would do
“whatever it takes” to ensure the survival of the euro, banks have effectively
been underwritten by the ECB.

Relief as Taper Has Minimal Impact

Johnson,
who manages the Old Mutual Corporate Bond and the Old Mutual Monthly Income
Bond funds believes that the tapering of the US Federal Reserve’s quantitative
easing programme, which was finally announced before Christmas, has had minimal
impact on bond markets as it had been telegraphed for so long.

In
response she disclosed that in recent months she has reduced the duration of
the bonds she hold, thereby reducing the funds’ vulnerability to rising
interest rates, which it is believed could come sooner than Mark Carney’s
predictions.

However,
net inflow of investment has been into bond markets rather than equities, which
indicates that those that retreated to cash or gold are only slowly regaining
their confidence.

Retail Bonds - Choose Carefully, Seek Ratings

Ms Johnson
urged private investors to be cautious when considering retail bonds; ‘There is
a huge divergence in the quality on offer. An investor in that space should
certainly look for bonds which have an interest rate 3 to 3.5% higher than the
interest rate offered on ten-year US Treasury bonds.’ she said.

She also
highlighted the thorny issue of ratings by stating the importance for investors
of ensuring that any retail bonds in which they invest have a credit
rating.

‘For a
private investor, they are unlikely to have the time or the resource to really
look into the companies issuing most retail bonds. A credit rating represents
the neutral opinion of a third party that has examined the bond issuer. Without
a credit rating, all a private investor knows about a bond
is what they are told by the bond issuer and the business – they are salesman
and not really acting in investors’ interests.

'I would
also say that if a bond issuer doesn’t want to pay to get a credit rating, or
doesn’t want to work with the agency to get a credit rating, an investor would
have to ask serious questions.’

Users of Retail Bond Expert will recognise the
sentiment, but also be aware of the argument that the cost of a rating could
have a negative impact upon the coupon an issuer is able to pay.